Conservative Claims and Rookie Economic “Mistakes”
One axiom I have noted over time is that when conservatives trumpet right-wing economic success or decry left-wing economic disaster, the claims are consistently riddled with distortions and errors, but there is usually at least one big, whopping Rookie “Mistake” involved. I use the word “Rookie” because the errors usually involve simple, fundamental errors in economic reality which a first-year Econ student could easily spot. I put the word “Mistake” in quotes because it seems pretty evident that they are not actually mistakes, as the errors are not random, but always work to conservatives’ favor.
This came to my attention again recently upon hearing the old conservative chestnut that minimum wage hikes will result in massive layoffs for minimum age workers, and a hike in unemployment overall. While no support for such a claim can be presented, and the record says the opposite, the claim is still made, and “facts” are published to “prove the point”—“facts” which feature these Rookie “Mistakes.”
Let me give you three whoppers from over the years and disassemble each one. The three are:
- Reagan cut taxes and doubled revenues;
- Obama drove up the unemployment rate to 10%; and
- Minimum wage hikes from 2007 to 2009 drove up unemployment for young people.
Jeff Cox at CNBC wrote in 2011, “During the Reagan years, the man they called Dutch cut taxes but doubled revenue…” while Sean Hannity in 2005 gave the meme in it’s most basic form: “Reagan cut taxes and doubled revenue in his eight years.” Limbaugh has repeated this chestnut repeatedly over the years, most recently in 2015, when he claimed that “the amount of money collected from the tax code’s almost doubled to 900 some odd billion dollars by reducing the rates.”
The “doubling” of revenue comes from taking the revenue from 1980 to 1990, and yes, it did increase from $517 billion to $1.032 trillion (find the data here). And yes, Reagan did cut taxes.
However, Reagan also raised taxes 11 times, including one of the biggest in history. How that comes out in terms of hikes vs. cuts is difficult to say, but there is naturally an evening out in play.
More importantly, Reagan was not president in 1980, and his first budget did not take effect until the beginning of 1982 (conservatives love to include 1980 because it contains the biggest distortion). Realistically, we should use 1981 as a baseline and 1989, the last year Reagan’s budget was in place, to compare. Between those years, revenue increased from $599 billion to $991 billion. Not a doubling, but still, a 65% increase. So, still impressive, right?
Well, here’s where the Rookie “Mistake” comes in. Reagan oversaw massive inflation in his early years. The inflation rate from 1981 to 1989 was 36.4%. Take that into account, and in constant 1989 dollars, we saw revenue rise from $871 billion in 1981 to $991 billion in 1989—a much lesser 21% increase.
The lion’s share of the increase that conservatives claim under Reagan came from inflation. Were Carter’s revenue increases to be measured in the same way, we would have to say that after only 4 years in office, he increased revenue by 69%! Even bigger than Reagan’s increase on a year-by-year basis! Jimmy Carter was even more an economic genius than Reagan! No conservative would agree to that, making their unadjusted claims about Reagan dishonest as hell.
But hey, we’re not done. Reagan’s biggest tax hike was in Social Security taxes. Sure enough, Social Security revenue increased 44% during his budget years. Personal income tax revenues rose only 14% in contrast.
Not to mention that revenue increased in part because the population of the country also rose, by 17.4% in total, and by 8.2% in working age population. Reagan could not have been responsible for that! These changes would increase consumer spending, the amount of business done, and the amount of revenue collected overall. By how much, again it is hard to say—but it likely cuts Reagan’s revenue increase due to tax policy down to the single digits, possibly the low single digits.
How much of the remainder was normal economic cycles? Again, hard to say. However you slice it, though, Reagan did not even come remotely close to doubling revenue. Accounting for inflation and factors beyond his control, it is arguable that Reagan oversaw almost no revenue growth at all.
Conservatives will try to muddle the picture by claiming that it was Democrats who raised taxes and who also raised spending, that Reagan did everything positive but Democrats sabotaged it—but Reagan signed every tax increase into law—none were passed over a veto—and seven of the eight Reagan-era budgets Congress passed were less than what Reagan proposed.
Next, let’s look at the unemployment claim. Some, like Limbaugh, not only claimed that Obama raised the unemployment rate to its peak at 10.1%, but even tried to get people to believe that he inherited a 5.7% rate from Bush—not even remotely true. Some claimed that Unemployment “rose steadily” for two and a half years after Obama took office, from 7.8% to 9.2%, neglecting to mention that it peaked 9 months after Obama took office and decreased on and off since then. Most were slightly more honest in saying that the rate rose from 7.8% when Obama came in to office and peaked at 10.1%, but were dishonest in claiming that Obama “caused” this.
The immediate and obvious fact that conservatives “overlook” is momentum. To blame Obama for the economy mere weeks or months after he walks into the Oval Office is dubious at best—not that conservatives were even that constrained, many instantly proclaimed the “Obama recession” in full effect mere days after he was elected. Reagan had a 10.8% unemployment rate after inheriting a 7.5% rate, hitting the peak a full 22 months after he entered office; I don’t hear conservatives saying that Reagan spiked his unemployment numbers. They’ll likely blame that on Carter.
I have often made the analogy to pilots flying an airplane: one pilot, Bush, pushes the plane into a steep dive, from 40,000 feet to 20,000 feet; in mid-dive, he hands the controls over to the new pilot, Obama, who immediately struggles to come out of the dive, but drops to 10,000 feet before he can level out. Critics immediately blame Obama for the 10,000-foot altitude, noting that he’s been in control of the plane for a full minute and a half.
However, the real Rookie “Mistake” comes into play when you consider the fact that unemployment is a lagging indicator—often changing only 2 or 3 quarters after an upturn in the economy. Take that into account, and Obama’s influence on the unemployment rate begins at 10.1%—and has fallen steadily ever since. This tracks with the fact that job numbers took a rare sharp turn very soon after the Obama stimulus, and when a 9-month lag is accounted for, tracks pretty much exactly with the unemployment rate.
And how does the lagging indicator account for Reagan? Not well—when unemployment caught up with Reagan, it had gone from 7.5% to 7.9%, only minor fluctuations. It shot up to 10.8% only after Reagan fully owned the numbers.
In short, Obama did not raise the unemployment rate to 10.1%, from neither 5.7% nor from 7.8%; the 10.1% was pretty much inevitable. As I have often pointed out, Obama has driven it down, now to such a low number (5.1%) that conservatives have been forced to resort to a variety of other metrics to make Obama look bad. (Reagan, by comparison, never got the number down past 5.3%.)
Finally, let’s look at the minimum wage. The conservative claim has always been that raising the wage will increase unemployment, using the very simple idea that businesses have a finite budget, and so if wages are raised, they will be forced to lay some people off. I recall Mary Matalin asking the question, “Where do you think that money comes from?”
The answer is part of the Rookie “Mistake”; to find out where the money comes from, first look at where the money goes. It goes to workers, who then have more disposable income, who then start buying more things, which then winds up in the hands of businesses paying the wages. They don’t even need to raise prices. That’s how the economy works, but it only works if done on a societal level—one business raising wages can’t trigger that effect.
But The Wall Street Journal, unsurprisingly, used bogus figures to back the conservative claim. In a 2010 article, often cited by right-wingers, they showed that minimum wage hikes instituted by Democrats after they took control of Congress in 2007 resulted in rising unemployment figures which tracked almost exactly with the wage hikes:
This chart was further exaggerated by right-wing bloggers, with the comparison skewed even more by dual axes:
Wow! Look at how those figures line up so perfectly! Iron-clad proof that the minimum wage destroys jobs!
Except for the other Rookie “Mistake,” that being the fact that unemployment rose in both charts because of the sub-prime mortgage crisis leading to a near-depression, and had nothing to do with the minimum wage. A first-year post hoc ergo propter hoc fallacy, committed by the supposed “experts” at the Journal, the kind of rational thought we can expect from people who blamed the sub-prime meltdown on businesses wishing people “Happy Holidays.”
This is par for the course. Conservatives “overlook” these “errors” in basic economic figuring only when it suits them. Despite the common stereotype that conservatives are more expert when it comes to financial matters, one has to question every claim and assumption made, especially by these jokers.
Another element of the Reagan era was the Volcker repression of the late 70s and early 80s was reversed when he quit and they put Greenspan in.
Carter faced INCREASING interest rates as Volcker tried to fight the incipient credit cycle driven by the immense baby boomer population hitting their 20s and 30s and beginning to borrow & spend.
(Nobody understands this demographic component of 70s inflation, alas)
https://research.stlouisfed.org/fred2/graph/?g=2iTz
shows the Fed head winds in 1978-82 and the tailwinds given to Reagan’s reelection and Bush’s election in 1988.
https://research.stlouisfed.org/fred2/graph/?g=2iTF
shows what also happened in the 1980s, the financial regime change of debt/GDP
This graph includes financial sector borrowing, but government and households also leveraged up immensely in the 80s:
https://research.stlouisfed.org/fred2/series/FYGFGDQ188S
shows how gov’t debt to GDP was suppressed in the 70s and then when Reagan came in suddenly “Deficit’s don’t matter” (in Cheney’s words).
https://research.stlouisfed.org/fred2/graph/?g=2iTK
shows the parallel spike in household borrowing, to be eclipsed when the Reaganites were put back in power last decade.
Few people understand this, either. We’re so bullshitted by rightwing propaganda here.
In other news I got a Leaf last week.
So chuffed about the year-end closeout deal I got . . . ~$19,000 off MSRP! (counting the $13,000 in gov’t discounts).
I’m driving ~30 miles a day now so that’s perfect for the Leaf. Any less and you’re not going to save much switching to electric and any more and you’re out of the sweet spot of keeping the battery pack between 25 and 75% charged.
It’s a 3 year lease and by 2018 Nissan is expected to have some pretty great 2nd-gen EV offerings out.
Have put 200 miles on it this week and have paid zero in driving costs — nissan has thrown in a free charging card which works at two places in town (here in my podunk hometown EV is kinda new, a Leaf is a very rare sight, I’ve seen one other one this past year).
The Leaf is about as problem-free as a Lexus, and the scheduled maintenance is just tire rotations every 7,500 and brake fluid refills every 30,000.
And as for the content of the comics, what is hurting employment more than wages is the rents the wage earners have to pay to the top 1% – 5% of the economy.
McDonald’s had a odd “life guide” for their employees, and in it the main expense their wage earners had to pay was rent, about half their income:
http://www.theatlantic.com/business/archive/2013/07/mcdonalds-cant-figure-out-how-its-workers-survive-on-minimum-wage/277845/
This rent is an asymmetric flow OUT of the paycheck economy and is largely why things are tough for workers.
On top of that is all the profits corporations are making. This is undistributed wages, too:
https://research.stlouisfed.org/fred2/series/CP
though half or so come from overseas operations now I guess.
took a political quiz thing to find the best candidate match.
Bernie at 96%, H at 95%, Trump lead the GOP at 50%.
Carson down at 15%.
Pretty much what I expected. It scares me to no end that so much of the GOP is buying whatever Carson’s selling.
At least I’d know what I was getting with Trump, a superficial idiot.
Carson’s idiocy is as of yet unplumbed.
@Troy
A friend of a friend got a Leaf about two or more years ago. The lease was $160 a month. His reduction in fuel bill (then $3.50+/gal) was about $160 – so he figured the car was basically free compared to other alternatives.
I think that is basically true with some of the other electric car alternatives.
I’ve heard that the e-car version of the Spark (available only in Ca.) is an uber pocket rocket, but perhaps a little less roomy on the inside.
According to 3rd hand reports I’ve read, when poled, 70-80% of the public agree with Sander’s policies.
This is why he agreed to run. This is why when he campaigns he prefers to stick to the issues.
It is also why Hillary has co-opted as much of Sander’s policy positions as she possibly can – not that she’d actually pursue any of them if she were elected into office, it’s just that she trying to whither the flow of democrats and others flowing into Bernies orbit. Once (and if) Sander’s is dispatched with, she’ll shed the populist progressive shtick like a prom dress at midnight.
I think she actually announced her intention to run quite early (for her, a prime candidate) – about 10 or so days before Bernie, so she could get posted up her leftist policy preferences before Bernie did so as to position herself so that she didn’t look like she was co-opting his policies as a reaction to him.
If she had come in after him, and said she was for the same thing he was, she’d look even less believable than she does now.
As for myself: I believe, in American politics, “he who pays the piper calls the tune.” That means what a candidate says means less, much less, than who they take money from. In essence, you aren’t voting for a candidate, as much as you are voting for the people they take money from. Back in the day (1964 – when Bernie was marching with MLK in D.C.) Hillary was a Gold Water Girl. I saw where she in 2013 got $3 million in personal remuneration for Speaking fees from BigBanksters, $750k from Goldman Sachs alone. (You give me one year of that in life and I’ll retire to a life of very quiet pursuits of the arts and the following of sports.)
That’s just in personal remuneration – It says nothing about what her campaign is getting. It appears that the Goldwater girl has become the Goldman-Sachs girl.
From my perch, my view of politics is its purpose is to affect economics. And ever since the onset of deflationary pressure on the economy (beginning with the recession at the end of the Clinton admin), the overwhelming need has been for demand side economics.
I now think that in a free market system with capitalism operating within it, it’s almost impossible to have supply-side deficiency for very long. If there is a shortage in the aggregate, relative to supply, then prices go up. When prices go up, ROI goes up. High ROI attracts more investors until ROI comes down.
The idea that you need to supplement supply in order to increase demand is an absurdity. This makes the inflation of the late Carter, early Reagan years an anomaly. Explaining and understanding the anomaly is important intellectually speaking. Your concept of the flood of baby boomers borrowing to create new households is one of the few things that support this. A one time spike in demand due to demographics would create a head wind to such a spike generating more investment for demand spike that is deemed as temporary.
The other was the impact of OPEC. Rising energy prices was bound to push up prices for all things that relied upon it.
Hey Tim,
Thanks for keeping the discussion focused on economics. I like your insightful comments about the urgency for demand side economics.
I am not sure we can assume Hillary will just “talk the talk,” but not “walk the walk” on economic policies. Does having “establishment” funding mean she will one day need to pay back her debt with policies that benefit only them? Sometimes a specific corporation will throw money at a candidate for altruistic reasons, while others may just want to protect themselves from the extremist ideas coming from the opposition (e.g. Trump’s “wall,” or Cruz’ elimination of the IRS, DOE and DOC).
Call me naive, but I believe it is possible to have a wealthy, corporate-funded president in the White House who has the growth of the middle class as a top priority. FDR and JFK were both wealthy backgrounds.
Having said that, I like Bernie’s grassroots approach. He has said that, once elected, he would not repeat the same mistake Obama made after being elected in 2009. Upon taking his oath, Obama essentially said, “thank you for electing me, now you can go back to your lives; I will take it from here…”
Clearly, this approach has cost us many victories that could have been won with stronger voices from the masses.
–kensensei